This paper outlines the ways in which tracing may be employed by plaintiffs to recover funds or other property. Tracing is ancillary to equitable, common law and statutory remedies, including constructive trusts, equitable liens or charges and orders relating to fraudulent conveyances. Complexities may arise in tracing claims into a fund or assets to which there are competing claims. “Principles of Tracing” was presented June 10, 2021 at the Trial Lawyers Association of B.C. conference entitled “Making Equity Work in Your Practice“, co-chaired by Mr. Parlow and Candace Cho of Onyx Law Corporation.

Table of Contents

I. Introduction

Tracing (sometimes called “following”) may be used to describe one or more of an equitable remedy, a remedy at law, or an accounting process. Sometimes it is said not to be a remedy but a mechanism to establish a proprietary claim.

Equitable tracing is almost always asserted as an adjunct to one or more other equitable remedies which form the “proprietary base” for the entitlement to trace. At common law, it may be asserted where possession has passed but legal title remains with the claimant.

As an accounting process, tracing is a mechanism used to establish whether and to what extent such an equitable remedy may be available. It may also be used to follow property which has been converted into other forms or transferred into the hands of others, even where a “proprietary base” is not established.

II. Tracing ancillary to other causes of action

Equitable tracing occurs ancillary to other remedies, such as an equitable lien, charge or mortgage; an express, implied or constructive trust; or a trust imposed by statute (e.g. under the Builders Lien Act, SBC 1997, c. 45).

Tracing as an accounting process may also give rise to an effective remedy in cases where a proprietary remedy does not exist and is not imposed by the court, for example where a creditor traces assets into the hands of others pursuant to the Fraudulent Conveyance Act, RSBC 1996, c. 163. The same or a similar regime may arise under the Bankruptcy and Insolvency Act, RSC 1985, c. B-3.

Finally, in limited circumstances tracing may be a common law remedy in its own right.

A. Constructive trusts

A constructive trust may be ordered where “good conscience” requires. There are two basic categories of constructive trust: “institutional or substantive” constructive trusts and “remedial” constructive trusts.

The distinction between substantive and remedial constructive trusts was set out by Lambert J.A. in Atlas Cabinets and Furniture Ltd. v. National Trust Co. (1990) 45 B.C.L.R. (2d) 99 (C.A.), 68 D.L.R. (4th) 161 at para 24:

A substantive constructive trust must be distinguished from a remedial constructive trust. In a substantive constructive trust, the acts of the parties in relation to some property are such that those acts are later declared by a court to have given rise to a substantive constructive trust and to have done so at the time when the acts of the parties brought the trust into being In a remedial constructive trust, on the other hand, the acts of the parties are such that a wrong is done by one of them to another so that, while no substantive trust relationship is then and there brought into being by those acts, nonetheless a remedy is required in relation to property and the court grants that remedy in the form of a declaration which, when the order is made, creates a constructive trust by one of the parties in favour of another party. [emphasis added]

Two criteria must normally be satisfied for a constructive trust to be found: (1) a monetary award must be inadequate, and (2) there must be an identifiable property to which the plaintiff contributed in some manner. In the current leading authority, Kerr v. Baranow, 2011 SCC 10, at para 50, Cromwell J. explained that in order to make out a constructive trust, the plaintiff must be able to point to a link or causal connection between his or her contribution and the acquisition of specific property:

. . . the constructive trust is a broad and flexible equitable tool used to determine beneficial entitlement to property (Pettkus, at pp. 843-44 and 847-48). Where the plaintiff can demonstrate a link or causal connection between his or her contributions and the acquisition, preservation, maintenance or improvement of the disputed property, a share of the property proportionate to the unjust enrichment can be impressed with a constructive trust in his or her favour (Pettkus, at pp. 852-53; Sorochan, at p. 50).

Remedial constructive trusts are commonly available to remedy a wrong with its roots in unjust enrichment. In Pettkus v. Becker [1980] 2 S.C.R. 834, 117 D.L.R. (3d) 257, Dickson J. held at para. 37:

The principle of unjust enrichment lies at the heart of the constructive trust. “Unjust enrichment” has played a role in Anglo-American legal writing for centuries. Lord Mansfield, in the case of Moses v. Macferlan put the matter in these words: “… the gist of this kind of action is, that the defendant, upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money”. It would be undesirable, and indeed impossible, to attempt to define all the circumstances in which an unjust enrichment might arise …. The great advantage of ancient principles of equity is their flexibility: the judiciary is thus able to shape these malleable principles so as to accommodate the change in needs and mores of society, in order to achieve justice. The constructive trust has proven to be a useful tool in the judicial armory ….

The remedy was initially used primarily as “a proprietary device that could resolve, at least in some cases, the injustice inherent in the common law of matrimonial property”: BNSF Railway Company v. Teck Metals Ltd., 2016 BCCA 350, at para 26.

Constructive trust scenarios have also evolved to include cases of breaches of fiduciary duty and fraud. In Soulos v. Korkontzilas [1997] 2 S.C.R. 217, 146 D.L.R. (4th) 214, a realtor’s taking, in his wife’s name, of a client’s opportunity to purchase property was said to give rise to a substantive constructive trust, i.e. one which had always existed. The requirements for imposition of the trust were (1) that the defendant was under an equitable obligation in relation to the activities giving rise to assets in his or her hands; (2) that those assets are shown to have resulted from activities in breach of the equitable obligation; (3) that there is a legitimate reason for seeking a proprietary remedy (such as ensuring such persons remain faithful to their duties); and (4) that there are no factors rendering such a trust unjust (such as innocent third parties).

McLachlan J.A. (as she then was), speaking for the majority at para 17, referred to the constructive trust as being imposed “not only to remedy unjust enrichment, but to hold persons in different situations to high standards of trust and probity and prevent them from retaining property which ‘in good conscience’ they should not be permitted to retain.”

Following a series of remedial constructive trust cases, in BNSF Railway, supra at para 53, Newbury J.A., for the Court, confirmed that “the ‘ancient and eclectic’ institution of the substantive constructive trust has not been ‘expunged’ in Canada by the development of its remedial counterpart”. In that case, the plaintiff’s claim for moneys had and received, subsumed in the law of restitution, was held to ground an action for a substantive trust.

B. Express or implied trusts

Tracing can be established where property has been transferred in breach of an express or implied trust. Such a claim will follow the requirements set out above, namely, the plaintiff will have to identify the property into which the trust property has been converted and the remedy must not be precluded by bona fide third-party rights. Subject to the foregoing, the claimant will be entitled to an in rem claim in the destination property as well as other property into which it may have been subsequently converted, whether directly or indirectly.

A traceable express trust was identified in PricewaterhouseCoopers v Bank of Montreal, 2017 NLTD(G) 43, a case involving a realty company in receivership. The Court held at paras 12-13:

The three certainties of trust are made out with regard to the Traceable Funds:

1)There was an intention to create a trust: the Traceable Funds were paid to 50549 on the basis that they would be held for the benefit of the vendor or purchaser;

2) The subject matter of the trust is certain: the amount of the deposit in respect of a given transaction;

3) The vendors and purchasers that are the beneficiaries of the trust are certain: trust interests in the Traceable Funds are limited to the vendors and purchasers on each

As a result, subject only to the contractual right of 50549 to withhold commissions from deposits credited to vendors, the Traceable Funds are subject to an express trust in favour of the vendors and purchasers, and must be disbursed to vendors and purchasers as required by each transaction.

C. Equitable liens, mortgages and other charges

The historical distinction between equitable liens and equitable charges has been much written about but inconsistently applied, with nomenclature varying over time and across jurisdictions. Sometimes, the two concepts are combined into the term “charging lien”. I will not focus too heavily on the distinctions in terminology in the course of this discussion on tracing.

Equitable liens and charges arise largely in three situations: by course of conduct; by agreement; and by statute.

Equitable liens arising by course of conduct are sometimes called “true equitable liens” and arise by operation of law to redress situations of unjust enrichment where it is “just and equitable” to impose them. Per Snell’s Principles of Equity, these liens confer “a charge upon property until certain claims are satisfied”; they “[exist] independently of possession”; and they are “enforceable by means of an order for sale.”¹

For example, by operation of law an unpaid vendor of property is given an equitable lien over the property for which he or she has not yet been paid. Such liens were considered in the development of the constructive trust and their utility may overlap with that remedy.

Similarly, an equitable charge is created “when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realization by judicial process, that is to say, by the appointment of a receiver or an order for sale”: Swiss Bank Corp. v. Lloyds Bank Ltd., [1982] A.C. 584 (HL).

Common intention is a central element to the imposition of an equitable charge: League Assets Corp., Re, 2015 BCSC 42 at paras 65²& 79. In that case no equitable charge was granted, since the Court did not find common intention between parties to make properties in question security for debt.

The interest in property arising from an equitable charge was reviewed by Barbara Cotton in her article,

“The Equitable Lien: New Life in an Old Remedy?”³, as follows:

An equitable mortgage is an interest in property and is different from an equitable lien in that it grants the mortgage the additional right to foreclose against the property. All equitable mortgages are equitable liens, but not all equitable liens are equitable mortgages. The distinction between the two is articulated by Buckley L.J. in Swiss Bank [Swiss Bank Corp v. Lloyds Bank Ltd., 1 [1982] A.C. 584 at 594-5]:

An equitable charge may, it is said, take the form either of an equitable mortgage or of an equitable charge not by way of mortgage. An equitable mortgage is created when the legal owner of the property constituting the security enters into some instrument or does some act which, though insufficient to confer a legal estate or title in the subject matter upon the mortgagee, nevertheless demonstrates a binding intention to create a security in favour of the mortgagee . . . An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realization by judicial process, that is to say, by the appointment of a receiver or an order for sale.

Depending on the circumstances, the plaintiff may be in a position to elect between an equitable lien and a constructive trust. A trust may be chosen where property has increased in value whether through accumulated profits, capital gains or a combination of the two. If the property has decreased in value, the plaintiff would prefer an equitable lien, preserving the right to claim against other assets.

The equitable lien is to be distinguished from a possessory lien over the client’s property which arises in certain situations. A solicitor’s lien may be used to secure fees and disbursements where property has been recovered or preserved as a result of a litigation proceeding in which the solicitor has been involved. As discussed in Wilson King & Co v Lyall (Trustees of), 1987 B.C.J. No. 709, 12 B.C.L.R. (2d) 353 (CA) at para 21, the purpose of a “charging lien” is to protect a lawyer from the unjust result of recovering or protecting property and not receiving full payment for services rendered.

As noted by the Law Society of British Columbia in “Solicitor’s Liens and Charging Orders” updated to July 2013, a charging lien may not fall under the traditional definition of a “lien”, as it may include property which is not in the solicitor’s possession. Rather, it reflects the solicitor’s right to request the equitable interference of the court and claim a charge against property that has been recovered or preserved through his or her efforts. In British Columbia, this right at common law has been codified in section 79 of the Legal Profession Act, SBC 1998, c. 9, which provides that a “lawyer who is retained to prosecute or defend a proceeding in a court or before a tribunal has a charge against any property that is recovered or preserved as a result of the proceeding for the proper fees, charges and disbursements of or in relation to the proceeding, including counsel fees”.

The solicitor’s right to assert a charge upon such property, and the solicitor’s right to assert a lien over client files are, therefore, legally distinct remedies although both may be asserted to achieve the same result.

D. Fraudulent conveyances and preferences

Tracing is regularly asserted as a remedy attaching assets which have reached others through fraud. The claimant may have a proprietary claim to the source or “referable” property by virtue of an express, implied or constructive trust, or an equitable lien or charge, for which case tracing may be an ancillary remedy.

Where there is no proprietary claim, tracing may nevertheless be mandated in consequence of governing legislation such as the Fraudulent Conveyance Act, supra, which renders a disposition of property void and of no effect against a person whose rights and obligations are or might thereby be “disturbed, hindered, delayed or defrauded”, unless the disposition was made “for good consideration and in good faith lawfully transferred to a person who, at the time of the transfer, has no notice or knowledge of collusion or fraud”.

To similar effect, under the Fraudulent Preference Act, RSBC 1996, c. 164 s. 2, a disposition of property by a person at a time when that person is in insolvent circumstances, is unable to pay his or her debts in full, or knows that he or she is on the eve of insolvency, is void as against an injured creditor if the disposition was made with the intent to defeat, hinder, delay or prejudice creditors or to give one or more creditors a preference over others. Dispositions made with the effect, but not the intent, of giving preference to any creditor may nevertheless be void if the proceeding to set it aside is brought within 60 days.

In regard to fraudulent conveyances and preferences and their counterparts under the Bankruptcy and Insolvency Act, supra, the distinction between tracing as an ancillary remedy and tracing as an accounting process may be critical to the consequences for the parties and others. Where the tracing claim is ancillary to a proprietary claim, the claimant may (subject to the rights of third parties) be entitled to a declaration that the traced property belongs to the claimant and an order that it be transferred accordingly (or that it be sold and the net proceeds transferred to the claimant).

On the other hand, when used on a basis ancillary to these or other statutory provisions, the consequences are generally that the transfer is unwound, the transferee and transferor are restored to their original positions, and the transferred property is sold and the proceeds (normally net of costs borne by the claimant) are distributed amongst all creditors legally entitled. Claimants without a proprietary interest may be subordinated to those with a proprietary interest.

III. When tracing is possible

The availability of tracing presupposes that specific funds or property can be located and readily identified, whether in a segregated fund, in a mixed fund, or in other property acquired therewith. In most such cases, the remedy will be realized by the imposition of a constructive trust on the traced asset(s). Equally fundamental is the requirement that the property has not been transferred to a bona fide purchaser for value without notice. The principles were enunciated as follows in McTaggart v. Boffo (1975) 64 D.L.R. (3d) 441 (Ont. H.C.J.), 10 O.R. (2d) 733, at para 67:

Tracing is only possible so long as the funds can be followed in a true sense, i.e., so long as, whether mixed or unmixed, it can be located and identified. It presupposes the continued existence of the money either as a separate fund or as part of a mixed fund or as latent in property acquired by the means of such a fund. Simply put, two things will absolutely prevent the tracing of trust monies:

a. If, on the fact of any individual case, such continued existence of the identifiable trust fund is not established, equity is helpless to trace it;

b. the chain for tracing is also broken where the trust fund either in its initial form or a converted form has found its way into the hands of a third person purchaser for value without notice.

The leading British Columbia authority on tracing is the Court of Appeal’s 2010 decision in (the aptly- named) Tracy v. Instaloans Financial Solutions Centres (B.C.) Ltd. 2010 BCCA 357, in which the Court cited with approval the foregoing principles from McTaggart. In Tracy, the Court traced funds impressed with a constructive trust, by virtue of there having been unlawfully collected by payday loan companies from their customers, into the hands of certain affiliated corporations. Newbury J.A., for the Court, considered the nature of the process of tracing:

[41] I conclude, then, that the trial judge considered the correct legal “tests” in approving a constructive trust as a restitutionary remedy for the defendants’ unjust enrichment. As mentioned above, however, it is only if the Unlawful Finance Charges or their proceeds are identifiable in the hands of defendants farther up the transactional chain than the Storefront Lenders that a constructive trust may be asserted against those defendants. The process by which the plaintiffs may ‘follow’ the Charges up the chain is tracing – the “process by which the plaintiff traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which they handled or received … can properly be regarded as representing his property”. (Per Millett L.J. (as he then was) in Boscawen v. Bajwa [1995] 4 All E.R. 769 (C.A.) at 776.) Although tracing is available both at law and in Equity (see Maddaugh and McCamus, supra, at chapters 6 and 7), the right which the plaintiffs are entitled to trace in this case is the constructive trust, an equitable property right. I agree with Professor Lionel Smith (The Law of Tracing (1997)) that the establishment of this proprietary right, which he refers to as the “proprietary base”, is sufficient to establish an entitlement to trace. It is not necessary, as was once argued, to demonstrate a pre-existing fiduciary relationship: see Citadel General Assurance Co. v. Lloyds Bank Canada [1997] 3 S.C.R. 805 at para. 57. [emphasis added]

Tracy will be addressed in further detail, infra.

In Jacobs v. Yehia, 2015 BCSC 267, the Court found at an interlocutory stage that there was an arguable case for the imposition of a remedial constructive trust in certain property into which misappropriated funds might be traced. Such property could be impressed with a trust either directly through unjust enrichment or indirectly by tracing property acquired with ill-gotten funds. As a result, a Certificate of Pending Litigation was sustainable.

In Edmonton Region Community Board for Persons with Development Disabilities v. Pearl Villa Homes Ltd., 2010 ABQB 786, the plaintiff alleged that from 2000 to 2003, the defendant had over-billed and was remunerated by the plaintiff for over $3 million in services it did not actually provide. There was evidence that the funds so obtained were transferred to certain persons who used them to pay down mortgages. As such, the Court found it not plain and obvious that the Plaintiff could not succeed in its claim for a constructive trust over the ultimate properties. The Court noted that such a trust would be subject to the limitations of the tracing process, as will be discussed further below.

IV. Tracing by competing claimants of properties fraudulently conveyed

In cases of fraudulent conveyances and preferences, our courts have addressed the principles of tracing in the context of competing claims to the property whose transfer may be considered ineffective. In Barregar v. Turi, 1997 CanLII 934 (BCSC), the Court traced the proceeds of a fraudulent conveyance into a property subsequently purchased by the defendant’s son and parents. The Court concluded, at para. 40, that “when property in the hands of a fraudulent purchaser is converted into money, the fund, once created, is impressed with the same trust as the property in its original form” and, on this basis, declared that the defendant’s family members held in trust for the defendant an undivided one-half interest in the destination property.

In Guthrie v. Abakhan & Associates Inc., 2017 BCCA 102, Newbury J.A. addressed the following core question, citing Frauds on Creditors: Fraudulent Conveyances and Preferences at 7-18⁴:

Precisely what happens when a court sets aside a fraudulent conveyance? What does it mean to say that a conveyance is good as between the parties, but void as between the debtor and his or her creditors? Where land has been transferred, what, if anything, happens to the title register where the creditor is successful in impeaching the transaction?

The appellant’s ex-husband had fraudulently conveyed property to his second wife. The appellant, who sought support arrears against the ex-husband, obtained a declaration from the Supreme Court of B.C. that the conveyance “is void and of no force and effect insofar as it affects the rights of the [appellant]” as well as a substantial order for trial costs, which she then registered against the transferred property. The property thereafter went into foreclosure and the net proceeds of sale were paid to a trustee in bankruptcy, who took the position that the funds should be available generally in the bankruptcy.

Newbury J.A. addressed the consequences of a fraudulent conveyance vis-à-vis competing claimants:

[26] I agree with the appellant’s submission, then, that the chambers judge erred in holding that the orders made by Humphries J. validly restricted Ms. Guthrie’s remedies under the Fraudulent Conveyance Act to the enforcement of Mr. Michie’s child support No authority was cited to us, and I have found none, that suggests it is open to a court to declare a fraudulent transfer “void” under the Act only to a certain extent or only to permit a certain debt to be recovered; to declare a transfer void only as against a particular creditor but not as against other creditors delayed or hindered by the transfer; or to declare a transfer void only for a limited time. Once a conveyance has been found to infringe the Act, it remains fraudulent, and is ineffective as against all creditors who may be hindered or delayed. As counsel for the appellant suggested, it would be “contrary to logic” as well as to authority (and in this case would be placing form over substance) to require that a creditor who wishes to enforce more than one judgment return to court to have the same transaction declared void “time and time again”. Similarly, it would offend the purpose of the Act to require that creditor after creditor prove in court that the same transfer was intended to avoid the just claims of creditors.

[emphasis added]

[27] On this point, I note in particular Canadian Imperial Bank of Commerce v. Boukalis (1987) 1987 CanLII 2694 (BC CA), 11 B.C.L.R. (2d) 190, lve. ref’d. [1987] S.C.C.A. 180, in which this court (sitting with five justices) ruled that a person who was a secured creditor at the time of a fraudulent conveyance had standing to sue under the Fraudulent Conveyance Act, as could a person who became a creditor after the conveyance took place. The Court cited with approval the following passage from Reid v. Kennedy (1874) 21 Gr. 86:

The words in the Act are “creditors and others,” and proving that the conveyance was tainted with fraud once, I do not think it loses this stain, but remains a conveyance with this infirmity which prevents it being set up as against a creditor whose debt arises years after the instrument was executed. The words “and others” extend the operation of the Act if the word creditors confined it to those existing when the deed was made…

and Petrone v. Jones (1995) 1995 CanLII 7374 (ON SC), 33 C.B.R. (3d) 17 (Ont. Gen. Div.), where the Court rejected the suggestion that “a transaction entered into with the specific intent of defeating, hindering, delaying…one creditor may be valid as against another creditor.” (At 19).

[emphasis in original]

This analysis was re-affirmed and applied in Vancouver Coastal Health Authority v. Moscipan, 2019 BCCA 17, at paras 102 – 105. Since the impugned transfer was not void but ineffective against all creditors, the Court held at para 105 that the trial judge erred at law by setting it aside:

In the circumstances of this case, Ms. Moscipan’s transfer of the Tennyson Property to herself and Mr. Moscipan as joint tenants and the subsequent transfer to him alone on Ms. Moscipan’s passing, are not to be set aside. Mr. Moscipan remains the registered owner of the property. He, however, holds the property subject to whatever claims which might be forthcoming from Ms. Moscipan’s creditors. They are entitled to attach her interest in the property as if the conveyances had not taken place.

V. Competing claims to a common fund or property

As early as 1880, Jessel MR, in Re Hallett’s Estate (1880) 13 Ch. D. 696, observed (at 710) that “modern [tracing] rules … have been … altered, improved, and refined from time to time”. In Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 SCR 534, [1992] 1 W.W.R. 245, at para 55, McLachlin J.A. (as she then

was) noted that equity’s “flexible remedies such as constructive trusts, account, tracing and compensation must continue to be moulded to meet the requirements of fairness and justice in specific situations” [emphasis added].

An excellent summary of the courts’ evolving approaches to competing claims to a common fund is that of Yamauchi J. in Easy Loan Corp v. Base Mortgage & Investments Ltd., 2016 ABQB 77, set out below.

While the facts in Easy Loan involved competing claims to a single bank account, the principles discussed may be equally applicable to properties funded by multiple contributors, either directly or indirectly, and sourced from a predecessor fund or funds.

Yamauchi J. considered that, by ordering the distribution of funds to competing claimants, the Court was essentially undertaking “loss allocation among the various investors” (at para 54). He then continued:

55 Canadian courts have determined that there are 3 ways in which this Court could order the distribution of the monies in the Bank Account among the Applicants and other investors, which are as follows:

(1) “First in, first out”: this is derived from the Clayton’s Case, Re (1816), 1 Mer. 572 (Eng. Ch. Div.) [Clayton’s Case], where the court held that the first money deposited into the account is presumed to be the first money withdrawn;

(2) Pro rata or pro rata ex post facto sharing based on the original contribution that the various claimants made, regardless of the time they made their If there is a shortfall, between the amount the claimant’s claim and the amount remaining in the account, the claimants share proportionately, based on the amount of their original contribution;

(3) Pro rata sharing based on tracing or the lowest intermediate balance rule (“LIBR”) which says that a claimant cannot claim an amount in excess of the lowest balance in a fund subsequent to their investment but before the next claimant makes its investment.

56 Although the rule in Clayton’s Case has been used by Canadian courts, practically it has fallen is [sic] disuse because it is “arbitrary and unfair“: Ontario (Securities Commission) Greymac Credit Corp. (1986), 55 O.R. (2d) 673, 30 D.L.R. (4th) 1 (Ont. C.A.) [Greymac, cited to DLR], aff’d [1988] 2 S.C.R. 172 (S.C.C.).

57 In Greymac, the Ontario Court of Appeal provided the following quotation from Walter J. Schmidt & Co., Re, 298 Fed. 314 (U.S. Dist. Ct. S.D. N.Y. 1923), at 316 in support of its holding:

The rule in Clayton’s Case is to allocate the payments upon an account. Some rule had to be adopted, and though any presumption of intent was a fiction, priority in time was the most natural basis of allocation. It has no relevancy whatever to a case like this. Here two people are jointly interested in a fund held for them by a common trustee. There is no reason in law or justice why his depredations upon the fund should not be borne equally between them. To throw all the loss upon one, through the mere chance of his being earlier in time, is irrational and arbitrary, and is equally a fiction as the rule in Clayton’s Case, supra. When the law adopts a fiction, it is, or at least it should be, for some purpose of justice.

Greymac at 15.

58 Of course, the reason why the rule in Clayton’s Case is considered arbitrary and unfair is because it is prejudicial to those who contributed earliest to the The reason it is a fiction is that no one knows with any certainty that the withdrawals from the fund were taken from the money first deposited. There is no allocation of loss. It places the loss squarely at the feet of those who deposited their funds earliest.

…

60 The LIBR approach assumes that the investor can identify the monies it has deposited into the fund. The sum of the amount existing in the fund at the time of the investor’s deposit and the investor’s deposit make up the total of the fund at that time. A simple calculation will determine the percentage of each to the total amount that makes up the fund. Sulatycky ACJ in Elliott, Re, 2002 ABQB 1122, 11 Alta. L.R. (4th) 358, 333 A.R. 39 (Alta. Q.B.) [Elliott] then outlines the way in which LIBR will work as follows:

… [W]here the funds in an account are depleted below the trust money balance, further deposits by the trustee cannot be accessed by the beneficiaries. They are, instead, limited to the lowest intermediate balance of the account. This is rational, because the entire line of cases being discussed is based on equitable rules of tracing. It is impossible to affix money subsequently deposited with the imprint of tracing. Only the money still remaining can be traced. [emphasis added]

61 In Boughner Greyhawk Equity Partners Limited Partnership (Millenium), 2012 ONSC 3185, 111 O.R. (3d) 700, 95 C.B.R. (5th) 239(Ont. S.C.J. [Commercial List]), aff’d 2013 ONCA 26, 5 C.B.R. (6th) 113 (Ont. C.A.) [Boughner, cited to ONSC], Morawetz J provides the following example of how LIBR works:

… A invests $100 in a fund. The value of the fund then declines to $50. B invests $100, bringing the balance in the fund to $150. The value of the fund then declines to $120.

In this fact pattern, if LIBR were applied, A could not claim more than $50, because that is the lowest balance in the fund prior to B’s investment. In other words, the initial decline in the value of the fund from $100 to $50 is borne entirely by A. When B contributes $100, her investment constitutes 2/3 of the $150 in the fund. As a result, when the fund declines to $120, 2/3 of the decline is borne by B, while 1/3 is borne by A. Therefore, of the $120 remaining in the fund, A can claim $40 while B can claim $80.

Boughner at paras 4-5.

62 In the end, the LIBR approach does not permit an investor to receive more than what can be traced from their Timing is important. [emphasis added]

63 Timing is not so important in the pro rata ex post facto approach, which Sulatycky ACJ described in Elliott as follows:

In the pari passu ex post facto approach applied in Law Society of Upper Canada v. Toronto Dominion Bank, the total quantum of available assets is determined — i.e., the amount remaining in the trust accounts. The funds are then shared proportionally among the contributors to the fund (except for any money contributed by the trustee, as that is considered applied to the shortfall). The date of deposits is ignored. [emphasis added]

64 Thus, in the example that Morawetz J provides in Boughner, A and B would receive $60, as each invested an equal amount of $100.

65 Thus, there are 2 approaches that this Court can consider when determining how best to distribute the monies in the Bank Account. Both have their advantages and disadvantages, which this Court will discuss in a moment. The overarching aspect, however, is that this Court must apply an approach that is logical, just, equitable and convenient: Greymac at 7; Law Society of Upper Canada Toronto Dominion Bank (1998), 169 D.L.R. (4th) 353, 42 O.R. (3d) 257, 44 B.L.R. (2d) 72 (Ont. C.A.) [TD Bank, cited to DLR] at para 31.

66 The LIBR approach has been criticized as being the reverse of the rule in Clayton’s Case in the sense that it is a “last in, first out” approach: TD Bank at para 9. As well, the LIBR approach is more difficult and more complicated than the pari passu ex post facto approach and, accordingly, the court should try to find a solution that is workable: TD Bank at paras 33-34; Greymac at Furthermore, the LIBR approach is difficult to apply “where there are numerous deposits and withdrawals, as the LIBR has to be determined at multiple points throughout the account’s history”: Elliott at para 37.

67 The pari passu ex post facto approach, on the other hand, “seems unfair to late investors”: Boughner at para 42, quoting Barlow Clowes International v. Vaughan (1991), [1992] 4 All E.R. 22 (Eng. C.A.). As stated in Waters at 1283, “Although there is a certain fairness in proportionate sharing, this approach shifts earlier losses onto later contributions, whose money could not possibly have been implicated in those losses.” Furthermore, in the case at bar, certain of the Applicants have acknowledged that they received payments of some form or another from Base Finance. As Morawetz J said in Boughner, “Just as earlier investors would not have expected to share their gains with later investors, they should not be allowed to so share their losses”: Boughner at para 56. [emphasis added]

68 The pari passu ex post facto is more simple to One simply takes the total amount remaining in the Bank Account and divides it proportionately among the investors in accordance with the deposits they made into the Bank Account. There is a certain complexity, however, in this approach. The Bank Account had an opening balance. How does one distribute the opening balance among the investors? Did those earlier investors, or some of them, invest in a legitimate scheme, or were they similarly “duped” by Mr. Breitkreuz? Which ones were duped? Must the amounts that Applicants and others received from the Bank Account be accounted for in calculating their losses?

69 In the case at bar, the parties have advised this Court that they have access to the complete records of the Bank Account from the date that Base Finance opened the account sometime in May of 2014, which shows not only the debits and credits, but also the balances in the account for all those transactions. As well, this Court assumes that RBC can provide the parties with the cancelled cheques that show the deposits. This differs from Elliott, where the parties provided Sulatycky ACJ merely with “evidence as to final balances and the dates and amounts of the claimants’ deposits”: Elliott at para How could Sulatycky ACJ possibly come to a rational conclusion that LIBR could be applied, given the paucity of the information the parties provided to him? His only choice was to apply the pari passu ex post facto approach.

70 This Court recognizes that the Ontario Court of Appeal (as affirmed by the Supreme Court of Canada) applied the pari passu ex post facto approach in Greymac. That application, however, does not derogate from Morden JA’s comment that although the pari passu ex post facto approach might be appropriate in some circumstances, he did not feel it would be appropriate “where the contributions to the mixed fund can be simply traced”: Greymac at 16. Morden JA went on to say the following:

I am not persuaded that considerations of possible inconvenience or unworkability should stand in the way of the acceptance, as a general rule, of [LIBR]. That it is sufficiently workable to be the general rule is indicated by the fact that it appears to be the majority rule in the United States. [emphasis added]

Greymac at 17.

VI. Extending remedy to assets not directly traceable

Once the entitlement to a proprietary remedy has been established, a question may arise as to whether the charge can be extended over assets that are not traceable. The answer is generally no, but exceptions apply.

The possibility to extend a proprietary remedy to assets not traceable under classic tests was considered by the Privy Council, on appeal from the Court of Appeal of the Bahamas, in Space Investments Ltd. v.

CIBC Co. (Bahamas) Ltd. [1986] 1 W.L.R. 1072 (P.C.) at 1074. The Court contemplated that where a bank trustee wrongly used trust funds for the general purposes of the bank, equity allowed the beneficiaries to trace the trust moneys to all assets of the bank and to recover the trust money by exercising an equitable charge over these assets in priority to the claims of both other customers with deposits and unsecured creditors. The rationale was based on the dicta of Sir George Jessel M.R. In Re Hallett’s Estate (1880) 13 Ch. D. 696 at 719, that “[i]f a man mixes trust funds with his own, the whole will be treated as the trust property, …. that is, that the trust property comes first”.

Ultimately, in Space Investments no equitable charge was available given a contractual provision which had authorized the deposit of the trust funds into the insolvent trustee’s general accounts.

Following Space Investments, the concept of extending the beneficiary’s claim beyond traceable assets was reconsidered, and rejected, by the English Court of Appeal in Bishopsgate Investment Management Ltd (in Liquidation) v Homan, [1994] 3 W.L.R. 1270, in which the plaintiff was the trustee of certain assets of pension schemes from which money had been improperly paid into a bank account of another company, MCC. This bank account became overdrawn and was subsequently replenished. Based on the Privy Council’s comments in Space Investments, the plaintiff sought an equitable charge on all the assets of MCC. The Court of Appeal found that the comments in Space Investments were strictly obiter and, in any event, were inapplicable where trust moneys had been paid into an overdrawn bank account. The Court held that equitable tracing cannot be pursued through an overdrawn and therefore non-existent fund nor can misappropriated money be traced into an asset bought before the money was received by the purchaser. In Bishopsgate, the alleged “replenishment” of the overdrawn trust fund had not occurred since there was no evidence of any intention that the new funds would be clothed with a trust in favour of the plaintiff. Overall the Court rejected in principle the concept that an equitable charge can be placed on assets which cannot be traced.

To similar effect, in Barnabe v. Touhey, 1995 CanLII 1672, (ONCA), 26 O.R. (3d) 477, the Ontario Court of Appeal refused to apply the remedy of constructive trust over the general assets of departing partners of a law firm on the basis that there was no specific property which would be the subject of the trust.

The requirement that constructive trusts be imposed on “identifiable property to which the plaintiff contributed in some manner” imports the concept of tracing. In this regard, Newbury J.A. in BNSF Railway, supra, applied the Federal Court of Appeal’s reasoning in Michelin Tires (Canada) Ltd. v.

Canada, 2001 FCA 145, to establish the underpinning of tracing. In Michelin Tires, overpayments made by the plaintiff in respect of federal sales tax were held not to give rise to a constructive trust because the claimant was unable to identify “property in the hands of the defendant that is identifiable as the property, or its proceeds, that was transferred by or obtained from the plaintiff without a juristic reason, or that the defendant could not otherwise retain in good conscience.” Evans J.A., for the Court, emphasized at para 19 that a constructive trust “attaches to specific assets of the defendant that represent the enrichment; it is not a charge on the defendant’s general assets for the amount of the plaintiff’s claim.” [emphasis added]

In family situations, however, the rules for tracing may be relaxed. In Peter v. Beblow, [1993] 1 SCR 980, [1993] 3 W.W.R. 337, Cory J. for the Court, cited with approval Goff & Jones, The Law of Restitution (3rd ed. 1986), and extended the imposition of constructive trusts to situations where a plaintiff’s contributions cannot be traced to a particular property. The Court stated at para 102:

It seems to me that in a family relationship the work, services and contributions provided by one of the parties need not be clearly and directly linked to a specific property. As long as there was no compensation paid for the work and services provided by one party to the family relationship then it can be inferred that their provision permitted the other party to acquire lands or to improve them. In this case the work of the appellant permitted the respondent to pay off the mortgage and, as well, to purchase a houseboat and a cabin cruiser. In the circumstances, the trial judge was justified in applying the constructive trust to the property which he felt would best redress the unjust enrichment and would treat both parties in a just and equitable manner. [emphasis added]

Another exception to the requirement to trace only specific proprietary claims arises where funds are deposited into a trust account with the intention of replacing misappropriated trust funds. In such a case, the new funds may be impressed with the same trust character that would have applied to the misappropriated funds: Ontario (Director, Real Estate & Business Brokers Act) v. NRS Mississauga Inc., 64 O.R. (3d) 97, 226 D.L.R. (4th) 361 (Ont. C.A.) at para 49. The policy basis underlying the exception is self-evident.

This exception was applied in PricewaterhouseCoopers v. Bank of Montreal, supra, involving a realty

company in receivership. The “Lump Sum”, as therein defined, had been deposited into a trust account which had been totally depleted, with an intention to replace trust funds that had previously been removed. Since it was a replacement, it was not traceable to specific transactions. Nevertheless, based on the principle in NRS Mississauga, the Court concluded that the vendors and purchasers with proven but untraceable claims were entitled to benefit from a constructive trust over the Lump Sum and to have the Lump Sum divided among them pro rata. Effectively, the pari passu ex post facto approach was applied to assets which were deemed to be trust funds.

VII. Adequacy of pleadings

A claim which is intended to ground a tracing remedy should be pled carefully, as a plaintiff’s claim may fail if the core requirements establishing the underlying proprietary claim have been omitted.

Inadequate pleadings may arise due to lack of historical information regarding the trust property, i.e. into what form it may have been converted. For example, a beneficiary without access to banking records – whether of the original trust property or of accounts into which the original property has been paid – may be in no position to meet the test of specificity in its pleading. Similarly, if moneys have passed from a trust account through one or more further accounts or properties before finding their way into land as the ultimate destination, no amount of sleuthing and no number of land title searches may reveal the chain.

Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57, a case involving alleged contraventions of the Competition Act, R.S.C. 1985, c. C-34, demonstrates the importance of pleading the essential elements even where details are unknown. In Pro-Sys, the Supreme Court of Canada, while allowing the action to proceed on other grounds, struck a constructive trust claim due to inadequate pleadings.

Applying Kerr, supra, the Court held that in order to find that a constructive trust is made out, the plaintiff must be able to point to a link or causal connection between his or her contribution and the acquisition of specific property. As the claim neither explained why a monetary award was inappropriate or insufficient nor did it demonstrate a link to specific “referential” property, it did not satisfy the conditions necessary to ground a constructive trust. The claim was struck on the pleadings as it was plain and obvious that it could not succeed.

However, in BNSF Railway, supra, the B.C. Court of Appeal rejected the notion that a plaintiff must necessarily “in its pleadings, and without the advantage of evidence or findings of fact, demonstrate that a monetary award would be inadequate or inappropriate and point to “identifiable property” to which it contributed, before it may seek a declaration of constructive trust founded on a valid cause of action” [emphasis added]. The Court found in para 4 that “it may be incorrect to rule, before any facts have been found, that a constructive trust is “bound to fail” on the basis that the two criteria have not been satisfied in the plaintiff’s pleading.” Newbury J.A. held at para 4:

Further, there are circumstances in which a plaintiff may satisfy the two criteria for the finding of a constructive trust − i.e., demonstrate that a monetary award would be inadequate and identify property to which the plaintiff contributed in some manner − in the course of discoveries or trial, or be able to trace its funds into a mixed account or elsewhere, once the defendant’s liability has been established. Thus it may be incorrect to rule, before any facts have been found, that a constructive trust is “bound to fail” on the basis that the two criteria have not been satisfied in the plaintiff’s pleading. [emphasis added]

In its pleading, the plaintiff had claimed that the two defendants “had and received” some $14m and $3.8m, respectively, allegations subsumed under the rubric of restitution; that the defendants held those payments in trust for it; that the defendants had been thereby enriched; and that there was no juristic reason for the payments or their retention.

The defendants argued that the plaintiff’s claim was bound to fail since there was no factual basis of either the inadequacy of damages or the existence of a “’link’ between the contribution that [founded] that action and the property in which the constructive trust [was] claimed”. Newbury J.A. disagreed and held that the necessary elements of a substantive trust had in fact been pled with respect to the claim for moneys had and received.

Nouhi v. Pourtaghi, 2019 BCSC 794⁵, provides an insightful application of the principles enunciated in BNSF Railway, and is a case study on effective pleading. Matthews J. considered the various allegations and arguments giving rise to the possible imposition of a remedial or substantial constructive trust and considered whether they were sufficient to ground a claim for a Certificate of Pending Litigation under s. 215 of the Land Title Act, R.S.B.C. 1996, c. 250, which I will loosely refer to as a form of pre-judgment tracing. Her Ladyship noted that where a constructive trust is referred to it is generally taken by the courts to mean a remedial constructive trust; and accordingly, a plaintiff who seeks a substantive constructive trust should plead that expressly.

After reviewing the authorities, the Court in Nouhi held, at para 29, that “for a substantive constructive trust, the causal link and inadequacy of a monetary remedy criteria should be pleaded as a best practice, but failing to do so is not fatal at the pleadings stage and cannot ground an order striking the claim at the pleadings stage”. However, for a remedial constructive trust “the opposite seems to be the case”, i.e. the plaintiff must plead the cause of action that is said to entitle the plaintiff to that remedy. With respect to the substantive constructive trust, although the plaintiff had pleaded that he had suffered deprivation in relation to an alleged fraud, he did not plead the requisite elements of that fraud (at paras 33-37). With respect to the remedial constructive trust, this was said to arise due to an unjust enrichment. Again, although the plaintiff had pled that certain monetary payments and share transfers had amounted to an enrichment and a corresponding deprivation, and further that the defendant had “utilized the monetary contributions to purchase, service and maintain the properties” thereby satisfying “the criterion of a causal connection or a nexus to the properties” he nevertheless failed to plead that monetary damages are, or may be, an inadequate or insufficient remedy with regard to the claim for unjust enrichment. As the pleadings did not “disclose a claim for an interest in land as they do not stage that monetary damages are, or may be, an inadequate or insufficient remedy”, the court ordered the CPL to be cancelled.

Relatedly, the recent case of Nextgear Capital Corporation v. Corsa Auto Gallery Ltd. ((2019 BCSC 1667 at para 41.))imposes a bottom line for the evidentiary standard: where there is a complete absence of evidence, the constructive trust claim was struck.

VIII. Two-stage trials

The Federal Court of Appeal’s decision in Michelin Tires, supra, suggests that once the link between the contribution and the property has been sufficiently pled, the Court may order an enquiry to determine if the required nexus has in fact been made out. Evans J.A. held at para 25:

Thus, Lord Browne-Wilkinson did not suggest in Westdeutsche Landesbank, supra, that Goulding J. had erred in Chase Manhattan, supra, when he ordered an inquiry into whether the mistaken payment could be identified in the defendant’s assets. Such an inquiry would only have been ordered if Goulding J. had thought that tracing was still required to determine the availability of a constructive trust.

While such a result might be considered contrary to the general rule against litigating in slices, and inherently risky, the Court of Appeal in Tracy, supra, affirmed that split trials can be a logical and efficient way of dealing with remedies where the facts and options may not be readily discernible from the outset.

The Court approved the trial judge’s conclusion that, although the plaintiffs “could not receive double recovery, they were entitled to refrain from making an election until they were able to ‘gauge which remedy [was] effective, particularly on the summary trial of common issues in a class proceeding’”, as seen below:

[47] The procedural implications of this entitlement were discussed in the Canadian context in the supplemental reasons in Waxman v. Waxman, supra. Under the heading “The Proper Tracing Sequence”, the Court rejected the argument that having failed to call evidence at trial relevant to the tracing of certain assets, the plaintiffs should not be allowed to “cure the deficiency by gathering information and tracing in stages.” The Court noted that if parties were required to call such evidence at trial, the cost and length of litigation would be greatly increased. The defendants were ordered to submit to cross- examination and discovery regarding their assets in order to permit the plaintiffs “to recover misappropriated trust funds after legal or equitable rights have been conclusively proved at ” (Para. 44.)

[48] Similarly in Island Records, the Court noted that where a plaintiff claims in the alternative damages or an accounting of profits, the practice in England is to have a “split trial”, the first stage trying the issue of liability and the second, if liability is established, trying the question of assessment of damages and the calculation of profits. Lightman continued:

… As a concomitant with this practice, there has likewise developed the practice of limiting discovery at the first stage to documents relevant to the issue of liability and excluding documents relevant only to the second stage. In this way the burden of discovery at the first stage is reduced, and the invasion of confidence necessarily involved in discovery is postponed and (if liability is not established) entirely obviated…

[49] In my opinion, the same reasoning should apply in cases where damages and constructive trust are sought as alternative remedies… I need not decide whether, if the plaintiffs do not succeed in obtaining complete restitution by means of tracing, they may then revert to seeking damages.

In cases involving a potential tracing remedy, counsel should give consideration to the possibility of a split trial for a number of reasons. It may be premature at the outset for the plaintiff to gauge the appropriateness or desirability of tracing as an effective remedy. The evidentiary difficulties involved in tracing may not be a justifiable use of a party’s or the court’s resources before the court has determined whether the merits of the alleged proprietary claim have been established. Defendants may also resist disclosure of assets until such claim has been made out.

The critical step is to think through tracing as a possible remedy, and to ensure the necessary elements of any underlying proprietary claim have been adequately pled, along with the assertions necessary to establish a potential tracing. This may be done in the absence of information required to specify actual alleged destination accounts or properties, transfer dates, and other particulars which will ultimately need to be proven.

IX. Conclusions

The following principles emerge from the authorities cited herein:

Equitable tracing claims are normally premised on establishing an equitable proprietary claim to identifiable assets.
Claims may also be made to trace assets which are subject to a statutory
Claims cannot be traced into the hands of a bona fide purchaser for value without
Except in family claims, plaintiffs with a proprietary claim to assets may not trace their claims preferentially over other creditors beyond the extent of funds or property demonstrably following from the proceeds of their original proprietary claim. The claim of the beneficiaries is prima facie limited to the lowest intermediate balance traceable into the account or property sought to be
In family claims, the principle is more fungible such that, where there was no compensation paid for the work and services provided by one party to the family relationship, it can be inferred that their provision permitted the other party to acquire or improve
In a competition between trust claimants, the applicable method of distributing funds will depend on the intentions of the parties, as discerned, for example, from a contractual requirement to
Where no such intention is discernible, the general rule is pro rata sharing based on tracing, which says that a claimant cannot claim an amount in excess of the lowest balance in a fund subsequent to his or her investment and before the next claimant’s investment is made. This is often simply expressed as the lowest intermediate balance rule or
Since the LIBR rule is predicated on the various contributions to the mixed fund or property being readily identifiable at multiple points throughout the account’s history, the pari passu ex post facto (or pooled accounts) approach will apply where that information is unavailable or impractical to ascertain. That approach involves taking the claim or contribution of the individual beneficiary to the mixed fund as a percentage of the total contributions of all those with claims against the fund at the time of distribution, and applying that ratio against the total assets available for distribution in order to determine the claimant’s pro rata share of those remaining funds.
Tracing must be adequately pled by asserting the requisite proprietary base and link to property which is identified, either specifically or generically, failing which the claim may be dismissed. Where based on a constructive trust, the plaintiff should also allege that a monetary award would be inadequate, insufficient or inappropriate in the circumstances.
The courts will permit a plaintiff to trace from the general assets to the specific assets based on facts discovered over the course of proceedings.
Tracing claims may, in appropriate cases, be the subject of split trials, being an exception to the so-called rule against litigating in slices.

PV Baker & P St J Langan, eds., Snell’s Principles of Equity, 29th ed (London: Sweet & Maxwell Ltd., 1990), at 456. [↩]
Citing Vancouver (City) v. Smith, 1985 Carswell BC 503, 63 BCLR 180 (C.A.) at para 12 [↩]
Barbara Cotton, “The Equitable Lien: New Life in an Old Remedy?”, (1994) at 4, online (pdf):<http://www.bottomlineresearch.ca/pdf/equitable_lien.pdf> [↩]
MA Springman, George R Stewart & JJ Morrison, Frauds on Creditors: Fraudulent Conveyances and Preferences (2016, looseleaf) at 7-18. [↩]
Appeal dismissed upon motion as moot 2019 BCCA 324. [↩]

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Principles of Tracing

I. Introduction

II. Tracing ancillary to other causes of action

A. Constructive trusts

B. Express or implied trusts

C. Equitable liens, mortgages and other charges

D. Fraudulent conveyances and preferences

III. When tracing is possible

IV. Tracing by competing claimants of properties fraudulently conveyed

V. Competing claims to a common fund or property

VI. Extending remedy to assets not directly traceable

VII. Adequacy of pleadings

VIII. Two-stage trials

IX. Conclusions

About the Author(s)

Dan Parlow

Related Services

I. Introduction

II. Tracing ancillary to other causes of action

A. Constructive trusts

B. Express or implied trusts

C. Equitable liens, mortgages and other charges

D. Fraudulent conveyances and preferences

III. When tracing is possible

IV. Tracing by competing claimants of properties fraudulently conveyed

V. Competing claims to a common fund or property

VI. Extending remedy to assets not directly traceable

VII. Adequacy of pleadings

VIII. Two-stage trials

IX. Conclusions

About the Author(s)

Dan Parlow

Related Services

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